The Journal of the Business Law Society at the University of Illinois College of Law is running a well documented article on Second Life’s Ginko corporation, which claims to have the equivalent of $475,000 US invested in it but which some have called a ponzi scheme, Meanwhile, Philip Linden has comparedGinko to the Grameen Bank of Bangladesh. Finally, someone is calling out Philip on this outrageous attitude. From the JBLS:

More curious than people’s willingness to give their money to Ginko, is that Linden Lab does not seem to find anything worrisome about the venture. Linden Lab’s CEO and founder, Philip Rosedale, believes that banks can exist within the virtual world of Second Life without regulation. Rosedale likens banks like Ginko to Grameen Bank of Bangladesh which makes small unsecured loans to the very poor to help them start businesses and work their way out of poverty.

Meanwhile, a well placed and reliable Herald source tells us that Ginko is in fact a ponzi scheme. We are not in a position to pronounce on the matter, given the real life legal implications, however we think it is about time for Ginko to show some transparency. Where is the money!? Open the books, and show us where the money has been invested. Is it in other Second Life businesses, or in things like sweet new rides, as our source insists? More to the point, if it *is* a ponzi, will Linden Lab be liable? From the article.

Given Ginko’s complete lack of transparency, if it turned out to be a swindle, it would be very hard for depositors to track down the person or persons behind it. Even if they were found, there is no guarantee that depositors would be able to obtain redress. If this were to occur, it is likely that the depositors would sue Linden Lab for not protecting them from fraud. By not taking efforts to ensure that commercial activity in Second Life is conducted in a transparent manner, Linden Lab is in essence putting their stamp of approval on ventures like Ginko. Linden Lab of course absolves itself of any liability for the actions of Second Life users in its Terms of Service Agreement, but there is no guarantee that the Terms of Service Agreement will hold up in court. If a court determines that Linden Lab is liable for fraudulent activities that take place within Second Life, they may be overwhelmed with suits. To avoid liability, and governmental regulation of the commercial activities within Second Life, Linden Lab should develop rules and policies that ensure commercial transactions between users are transparent and legitimate.

See Virtually Blind for further discussion and an observation that, with yields down 60% in 16 months, it does not look good for Ginko investors.

27 Responses to “Is Ginko’s Alleged Ponzi Game About to Implode? Will Linden Lab be Held Liable?”

Prokofy Neva

Feb 23rd, 2007

Periodically, somebody focuses on Ginko and decides to agitate about them being a Ponzi scheme. The theories abound, that they make their money in RL gold selling, or some other RL business that itself might be a scam; they are secretive and that spawns rumours. At the end of the day, people shrug. They are adults, and they don’t want other adults interfering with what they see as their right to spend money as they wish.

I’m amazed at how many people put money into Ginko, but it’s not surprising: because it works for people to make money. People also like the idea of saving and keeping money out of reach from impulse buys. So the stream of people to do this is enormous. After watching Ginko operate for 2 years, and not collapsing, I’m forced to conclude that while in the real world, various factors come together to prevent this from happening, in a synthetic world, the volatility of the currency and changing circumstances and endless growth of the population all work to make pyramid schemes actually work.

And that’s why Philip can think of them as a microloan scheme good for the third world, or an emigrant banking or credit union system. It enables the wealthiest players to make a bit of money on their vast sums of Lindens that they can’t always cash out at good rates, and in a sense subsidize loans to new players. It’s quite possible that people will come to see it as an emigrant bank or a Grameen bank indeed.

The rates of interest have steadily decreased, in part response to the actual decreasing of the value of the Lindens at times.

The reality is, even if Ginko opened up their books like a sieve tomorrow, and you could learn every single thing about them, your ability to extract something out of them in a world where the TOS says the currency has “no intrinsic value” would be zilch.

Just a thought

Feb 23rd, 2007

For once I kind of agree with Prok …. strange isn’t it?

I would however like to add that, barring incredibly wealthy person or a real world bank coming into SL and making an SL bank of their own, of COURSE the money is more likely to come from other bankers more than the founder’s pocket!

That said I use Ginko myself and have a whopping 257 lindens to my name.

“I actually believe that they could still use something akin to the Grameen model to establish a reasonable credit risk in their lending”.

Make of it what you will, but it’s not exactly a ringing endorsement for Ginko.

2. It’s difficult to see how they could possibly be operating and NOT be a Ponzi scheme. These schemes can and do happen in the real world (checkout http://en.wikipedia.org/wiki/Ponzi_scheme ). They can take years to play out, but they all eventually collapse. SecondLife’s continual influx of new residents, the confusing nature of transactions being in a different currency and the innate trust most people have with the well regulated banks of the real world all conspire to perpetuate this scheme.

However, given the amounts of real world money involved, I’d much prefer that people learn a lesson in SecondLife and the real one. Maybe a minor financial bruising gained in SL will be enough to inoculate people to real world financial scams and their more serious consequences.

3. SecondLife’s TOS declaring that Linden dollars have “no intrinsic value” isn’t unusual. For instance, US currency has had no intrinsic value since we dropped off the gold standard.

Prokofy Neva

Feb 23rd, 2007

Hal9k, look, this old “we went off the gold standard” canard, the favourite of tekkies who are always trying to devalue stuff and subsitute only their own esoteric knowledge as “value” can fuel 100 pages of arging, or you can open up your wallet, look at your dollar bills, and see that they are redeemable. Unlike LL, the USG doesn’t say “we will never buy back your dollars”. Even if the US Treasury doesn’t operate with gold reserves as it once did, there is still “Fort Knox” — there is still the wealth of the nation. The whole reason why the peoples of the world strive to turn their poor country’s worthless scrip into dollars is being it remains a symbolic paper that is backed by the economic might of the US, which is in turn backed by its military might. Wave it away as much as you will — the dollarized economies of the world laugh at you.

RL Ponzis don’t last 2 years. Maybe they did in the 18th century; things like MMM in Russia collapsed much faster, and similar things do everywhere all over the world because of the media. But here’s the media — the Herald — trying to uncover this scam periodially every little while for years, and it won’t break. People even get angry if they think some newspaper is telling them how to spend their game money. It’s one of those things that will likely go on working even though it shouldn’t — like a lot of Second Life stuff.

Alex Fitzsimmons

Feb 23rd, 2007

“Even if the US Treasury doesn’t operate with gold reserves as it once did, there is still “Fort Knox” — there is still the wealth of the nation.”

That’s kind of a meaningless thing to say given that Roosevelt decoupled the dollar from gold back in 1932, don’t you think? The US hasn’t been able to back its dollars with gold for many decades, rapidly approaching a century.

Tad McConachie

Feb 23rd, 2007

“It’s one of those things that will likely go on working even though it shouldn’t.” Isn’t that what a lot of people were saying about the internet economy just before the bubble burst in 2000/2001? When the NASDAQ hit 5000, I remember predictions in Wired about it making it all the way to 25,000 in a few years and that it’s unprecedented rise showed that there were new economic models being created. Soon after that the market collapsed.

If LL refuses to shut down seemingly ponzi schemes like Ginko and they eventually collapse, then nothing will stop someone else from starting up a new one in its place.

“Oh well, Ginko was obviously a ponzi scheme. We’ve learned from their lessons and here’s our nearly identical business plan, but we’ve got it figured out and it’s NOT a ponzi scheme. We promise. Trust us, but remember, there’s no guarantee that we won’t go bankrupt…”

Tad McConachie

Feb 23rd, 2007

Alex: the Rothschilds, Rockefellers and the Council on Foreign Affairs all work in concert to ensure the continuing solvency of the US dollar.

Alex Fitzsimmons

Feb 23rd, 2007

“Alex: the Rothschilds, Rockefellers and the Council on Foreign Affairs all work in concert to ensure the continuing solvency of the US dollar.”

That’s unkind of you. Why aren’t you giving credit to OPEC, which by accepting only dollars for oil, effectively substituted oil for gold as the backing of the US dollar?

Besides, you’re changing the subject. Prokofy stated that the “wealth of the nation” still exists in the form of gold. I pointed out that it really doesn’t — not nearly enough of it to back all of those dollars we’ve got floating around.

Tad McConachie

Feb 23rd, 2007

Alex, I could have given credit to OPEC, the New World Order, etc, however we both know that the true force behind all of those groups are our Reptilian Humanoid overlords – all praise be unto them.

Whether or not Ginko *is* a ponzi scheme is beside the point of the article which is focused on the possible legal ramifications resulting from a successful theft of money via SL. They’d've been wiser to pick another example; then again, SL players weren’t their audience.

Have you heard the one about Fate Gardens being used to launder international smuggling funds?

Prokofy Neva

Feb 23rd, 2007

>The US hasn’t been able to back its dollars with gold for many decades, rapidly approaching a century.

Again, the “worthless unbacked US dollar” is an Internet that various tekkies, goofballs, trolls, leftists, anti-Americanists, etc. trawl up every so often on schedule. The US dollar is backed by the wealth of the nation. That isn’t in “gold” but in other assets, including people’s labour. It’s a fiat currency. And…in order to be able to declare something by fiat, you need wealth and power.

In fact, the US also owns gold too lol. I didn’t say that the wealth of nations still exists in gold — I said the *dollar is backed by the wealth of the nation*. Among the many things that make up that wealth happens to be gold, too. It’s not the primary resource.

Um, “Fort Knox” is put in “scare quotes” precisely to indicate that it is a SYMBOL. It is not its literal gold but the wealth of all forms and might of all forms that the US has — or any country with currency that people don’t carry around in wheelbarrels.

Please, spare yourself the Wikipedia pasting and mind-meming. US currency is backed. Linden currency is not backed. End of story.

“Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything ”

Let’s repeat that, for the benefit of the cumudgeon in NYC: “and receive no backing by anything”.

But no doubt Prok will claim that this US Treasury web page was written by some “tekkie wiki literalist” and can’t be true.

Just a thought

Feb 23rd, 2007

On that I have to correct you: US currency – and indeed ALL currency – is nothing at all but a piece of paper or fabric or even metal. There is no value aside from what Humanity wishes it to have.

Please spare your retort and attempt to rationalize a nonexistent backing for any form of currency that cannot be used as food, drink, or housing. The only ‘currency’ that ever had any value whatsoever was the old barter system, through which you got something that could sustain your life.

Paper can not do that – you cannot eat it nor drink it. The same for metals.

End of story. Enter Data, end Program.

Tad McConachie

Feb 23rd, 2007

Alex, by dismissing my irrefutable proof of the Reptilian Humanoid “conspiracy,” you’re either outing yourself as one of them, or just helping me prove my point.

The difference between actual, recorded history and the rantings of David Icke is that Icke is right. He says so himself! What more do you need?

Nacon

Feb 23rd, 2007

Well here’s a better idea… DON’T USE IT! Dumb asses.

I only make money… not pay money for more linden money or “loan” crap.

Is Ginko’s Alleged Ponzi Game About to Implode? Will Linden Lab be Held Liable?

“The Journal of the Business Law Society at the University of Illinois College of Law is running a well documented article on Second Life’s Ginko corporation, which claims to have the equivalent of $475,000 US invested in it but which some have called …

IntLibber Brautigan

Feb 28th, 2007

The real trouble with the Grameen Bank comparison is that its entirely backwards in an anti-Robin Hood sense. Ginko does not lend money to SL people or ventures, period. They told me this specifically when I went to them to seek financing for my first sim buys.

So, if Phillip thinks that zero loans is quantitatively equal to “microloans”, he’s spinning Ginko like a White House press secretary.

For the other consumers in SL interested in the issue, I can share my own experiences with different SL banks:

My Second Bank (formerly Meta Bank): financed my first land purchase of a half sim, pretty transparent about who the owners are, actually enjoy talking to you IRL so the can ensure the people they lend to are legit. Later financed part of my estate expansion (for disclosures sake), and are always lending money to people for land purchases.

Ginko: as stated previously, not interested in investing in SL people or ventures, suspect they use their depositors money for their own real estate development. If so, and depositors are happy, then so be it, but they shouldn’t call themselves a bank, they are a Real Estate Investment Trust.

NN Bank: Nonnux White’s REIT. I was the first non-Nonnux White person they considered for a loan, but they kinda flaked on me, and fortunately I wound up not needing the loan. You might see her about a loan yourself.

Midas Bank: Midas Commons has his bank and his gaming empire, and has expressed interest in lending or investing with us, but have not pursued it. You might try them.

OurBank: Owned by LukeConnell Vandeverre’s Hope Capital/World Stock Exchange, offers “real world” depositing and lending interest rates. I tend to not agree with their rationale for this, given the world of SL has an economic growth rate in the hundreds of percents, most interest rates I’ve seen from other banks, which may seem high by RL standards, are actually cheap money relative to SL growth. On the plus side, Luke is dedicated to transparency and reports his ventures numbers to stockholders like a responsible corporate leader should. This gets big ethical points with me. DISCLOSURE NOTE: I am on the board of directors of Hope Capital.

There are a number of other banks popping up all the time, which I’ve not checked out. Perhaps an SL Herald reporter will make the rounds and report on them all in the interest of consumer awareness.

IntLibber Brautigan

Feb 28th, 2007

Oh, and Prok: No, the dollar is not backed. Firstly, its not a dollar, its a debt note issued by the Federal Reserve System, which is a private bank, the US govt does not own it or even any stock in it, the govt gets the right to appoint the Chair of the Fed board in exchange for giving the Fed the monopoly right to issue fiat currency, and guaranteeing that the US will pay up if the Fed goes tits up. Even the Fed will admit this if you ask them.

Federal Reserve Notes are almost entirely backed by other debts: US T-Bills, i.e. US Govt debt. The Fed holds a small amount of gold certificates and gold boullion, which were turned over to it in 1933 by FDR when he declared a state of national emergency (i.e. national bankruptcy). While the gold bugs think that backing debt with debt is insane, it all depends on whose debt you are talking about, and whether those person have sufficient assets and cash flow to pay the debts. Currently 40% of the land in the US is government owned (local, state, and federal), and is valued somewhere between $22-30 trillion US. This is obviously sufficient to collateralize current US debts, and much of its future liabilities (when those liabilities come due, that land will likely be worth much more, so its no big deal).

So you can say that, at least indirectly, the Federal Reserve Note is backed by the national parks, military bases, and other federal facilities, just as your mortgage on your house is backed by the value of your home.

Do I think Ginko is in some way fraudulent now? Yes
Do I think Ginko is a ponzi? Yes
Do I have any proof of it? No
Do I think at some point in the future Ginko will suddenly vanish with the money? Maybe
Do I think Ginko would be held liable? This all depends on the courts determining how real SL of money are.
Do I think Linden Lab is in any way responsible? No

…Do I use Ginko? All the time. They’ve been great. Better customer service than LL, and I’ve made a lot on excellent interest rates.

Economic Mip

Mar 3rd, 2007

What gives a currency value is that it is acceptable as a means of payment by someone in real life. Now by this definition, the Linden is not a currency nor is the Somaliland shilling, or (outside of Zimbabwe) the Zimbabwean dollar. Now hopefully one will realize that I am not saying that Lindens are worthless, only that due to their origin they cannot be technically or legally considered a currency. They are more on par with an arcade game token. Unless this changes, few real life banks (especially those in developing countries) are going to set up shop in Second Life due to the high risks of a private corporate owned money system. A shame, because it would make Zimbabwean money laundering (oops I mean “remittance payments” ) much easier.

Urizenus

Mar 3rd, 2007

What are you talking about EM. People accept Linden dollars for RL work and goods all the time. And in any case, the borders of the magic circle are so porous here that I don’t see how you can classify the goods and services offered “in world” as not being RL either. They just happen to be digital and delivered via the internet, but then so is much of the music, software, and other forms of entertainment that we download.

No currency is accepted everywhere. The Zimbabwean dollar (if there is such a thing) may not be the most stable currency in the world, yet no economist would deny that it is still a currency. I don’t see why an economist would deny that the Linden dollar is a currency, even if the central bank is in effect Linden Lab rather than a third world government.

“Isn’t that what a lot of people were saying about the internet economy just before the bubble burst in 2000/2001? When the NASDAQ hit 5000, I remember predictions in Wired about it making it all the way to 25,000 in a few years and that it’s unprecedented rise showed that there were new economic models being created. Soon after that the market collapsed.”

Which is the dot-com/dot-bomb sequence that will happen with Second Life if the status quo remains.

Prok is right, guys. Yeah, yeah, all currency is just what we agree to accord value to. If I want to pay you in Monopoly money and you agree to take it that’s fine, ok, thanks for getting the fifth grade revelation of subjective reality a little late.

The Linden Dollar isn’t a currency for a few reasons:

A) Its controlling entity says it isn’t one
B) There *is* a controlling entity, who has unfettered access into the “wallets” of its users and retains the right to inflate/deflate/disseminate/reappropriate the “currency” at its whim.
C) By and large, people do not use it for anything outside of the game.

The only way you could regard L$ as a currency is if you were so swept up in the roleplaying that you lost perspective on the situation as a whole.

>Which is the dot-com/dot-bomb sequence that will happen with Second Life if the status quo remains. — Petey< I'm glad to see that someone else views SL as a potential dot.com bust. Mind you, LL might yet turn things around and pull out of their 2+ year tailspin, but geez, I've rarely seen a more unstable platform or unstable company in the time I've used the internet-- and I'm in the business.

>A) Its controlling entity says it isn’t one
B) There *is* a controlling entity, who has unfettered access into the “wallets” of its users and retains the right to inflate/deflate/disseminate/reappropriate the “currency” at its whim.
C) By and large, people do not use it for anything outside of the game.

>The only way you could regard L$ as a currency is if you were so swept up in the roleplaying that you lost perspective on the situation as a whole. — Petey<

There’s quite a debate over this. I have never regarded L$ as “currency” in the legal sense; to me it was monopoly money. However, it IS a tradeable good, which means it has RL value. As such, while it might not be considered “currency” per se… but it is an asset with real value. So while it might not catch IRS scrutiny as money earned, it might very well catch their attention as a capital gain.

If that happens… they could consider such retroactively– upon which LL and associates will have major coronaries.